No. 4, 2009

Oil of Russia magazine talks to Rinat Dautov, General Director of LUKOIL Trading House

LUKOIL Trading House was set up in 1992 in order to centralize materials and equipment supplies to all the Company's facilities.  Since that time, under the difficult conditions of the transitional period in Russian society, the company has developed into a modern business operating successfully in the market environment.  Today, uninterrupted operation of all the divisions of the LUKOIL Group is largely dependent on the company's efficient performance. 

Q:  What are the functions of LUKOIL Trading House at present?

A:  The main purpose of our company is centralized logistics support of LUKOIL Group organizations - from supplies of work clothes and building materials to sophisticated process equipment used for producing and refining oil, as well as for marketing petroleum products. 

The key objective formulated by the Company's President Vagit Alekperov in setting up LUKOIL Trading House was to provide organizations of the LUKOIL Group with materials and equipment at competitive prices.  This goal could be attained only by consolidating the volumes of goods purchased for the needs of the LUKOIL Group organizations in the hands of a single operator. 

Placement of large orders with manufacturers means additional discounts for LUKOIL Trading House.  Today we may say with confidence that we have succeeded in reducing the prices of procured goods to below the average market level, which, within the LUKOIL Group as a whole, gives a substantial economy of scale and boosts the returns on the investment projects implemented by the company.

Q:  In the context of the tough financial and economic situation in the world today, many companies are cutting back their production and investment programs and investing less in retooling.  To what extent, in your opinion, has this situation affected the LUKOIL Group of companies in general and LUKOIL Trading House in particular?

A:   Indeed, the drop in world oil prices and the difficult situation in the global economy have affected companies in the oil and gas sector, both in Russia and abroad, and this has caused them to review their production programs.  At the same time, there is also a silver lining to the current financial and economic crisis.

I believe a particularly favorable situation has taken shape under the current economic crisis for domestic manufacturers of materials and equipment who are not yet in a position to compete with their foreign counterparts. Given correct production management and a well-thought-out marketing policy, the corporate management simply must take advantage of emerging opportunities. 

The main challenge facing the manufacturers of materials and equipment given the cheap national currency is try to replace imported technologies and oust imported goods from the Russian market, since, owing to the devaluation of the national currency, such goods are becoming uncompetitive and remain on the domestic market merely because there are no locally-made analogues.  A professional approach to meeting this challenge will allow the manufacturer to occupy a new niche on the market and it will probably be possible to retain the demand for its goods created by the current market conditions even after the economic situation has stabilized.

This goal cannot, of course, be achieved in the space of just a few months.  Even so, it is important to note that the domestic manufacturer must not let slip by the most propitious situation that has presently taken shape.  The state also stands to gain in this case - the motivated competitive domestic producers may help reduce unemployment throughout the country, replenish the budget and strengthen Russia's positions on the international market.  As far as we are concerned, we are willing to co-operate with and support such producers. 

Q:  How does LUKOIL Trading House hold tenders for purchasing oil and gas equipment, pipes and other materials?

A: In 2009, LUKOIL adopted new Regulations on holding tenders, which set out a new procedure and mechanisms for holding tenders and selecting the winner.  The Regulations apply to all LUKOIL Group organizations located in Russia, including LUKOIL Trading House.

The new mechanism for holding tenders is called on to ensure an unbiased and, at the same time, effective choice of suppliers of goods, work and services for organizations within the LUKOIL Group. The main feature of the new mechanism for holding tenders consists in the mandatory holding of tenders in the presence of participants and a multi-stage expert assessment of tender proposals, in both technical and commercial terms.  As a result of a tender, the supplier with the best of price\quality ratio is identified and awarded the contract.  Such factors as delivery time for goods, work and services and settlement conditions under the contract are taken into account.

In implementing the company's policy in procuring materials and equipment, including sophisticated process equipment, we do not put any individual producers in a priority position.  All producers participate in tenders on equal footing.

We have been working on the market for supplies of materials and equipment since 1992 and we have accumulated considerable experience of interaction with 2,000 manufacturers of materials and equipment used by the LUKOIL Group organizations.  Producers of quality goods are well known to us and we also have statistics on those whose output leaves a lot to be desired.  In choosing a supplier by means of a tender procedure, we take into account the opinion of our customers about the equipment of a specific manufacturer they worked with.  There are times when, on the basis of the results of a technical assessment of tender proposals, we are compelled to reject a producer's output because its quality does not meet the requirements set within LUKOIL, even though the given goods might be the cheapest among the alternative proposals made by other manufacturers.  The price of goods is one of the main factors in determining the tender winner, but it is not the decisive one.  This approach allows us to maintain a competitive price level while also maintaining the quality of the oil field equipment and other materials and goods we supply.